Donor-Advised Funds

The plain answer

A donor-advised fund, or DAF, is a charitable account. You make an irrevocable gift of cash or appreciated shares to the sponsoring organization, then recommend grants to eligible charities later.

The contribution may qualify for a charitable deduction in the year you fund the account if you itemize and meet the tax rules. The money no longer belongs to you, even though you can recommend investments and future grants.

A DAF can help when you want to make a large charitable gift this year but decide which charities receive the money over time. It is not required for ordinary giving.

How it actually works

1. You open an account with a sponsoring charity.
2. You contribute cash, publicly traded shares, or other assets the sponsor accepts.
3. The sponsor controls the assets and may invest the balance.
4. You recommend grants to eligible charities.

Appreciated shares can be especially useful. If the gift meets the rules, donating the shares can avoid selling them yourself and may allow a deduction based on their fair market value. Holding periods, deduction limits, valuations, and the type of charity can change that result.

The sponsor charges administrative and investment fees. A DAF also creates another account to manage, and sponsors may impose minimum contributions or grants. Compare those costs with the benefit before opening one.

What this means for you

A DAF is most useful when it solves a real timing or asset-gifting problem. It can separate the year of the deduction from the years in which charities receive grants, and it can make gifts of appreciated shares easier to organize.

If you give modest amounts of cash each year, direct gifts may be cheaper and easier. Do not spend a dollar to save thirty cents in taxes. Choose the giving method that supports your charitable goal first, then consider the tax effect.

Keep the contribution receipt and records showing the asset, acquisition date, cost basis, fair market value, and transfer date. Large or unusual noncash gifts may require an appraisal and additional tax forms.

Common mistakes

• Treating the DAF balance as personal money that can be reclaimed.
• Assuming a grant from the DAF creates a second charitable deduction.
• Contributing appreciated assets without confirming the sponsor accepts them.
• Ignoring fees, minimums, valuation rules, and substantiation requirements.
• Using a DAF for personal benefits, pledges, or payments that the sponsor does not permit.
• Funding the account only for a tax break when direct giving would meet the same goal at lower cost.

Related pages

• Charitable giving
• Standard deduction vs. itemizing